The St. Louis industrial market is in the middle of a significant construction boom. Total square footage under construction is at a record-high 6.3 million square feet, with 2.8 million square feet of activity completed in 2018. The last two years have experienced historically high levels of overall net absorption with 4 million square feet in 2017 and 5.6 million square feet in 2016. These absorption levels are significantly higher than pre-recession market numbers.
The expected 3 million square feet of positive absorption in 2018 is 1 million square feet higher than what had ever been recorded prior to 2014. A significant portion of this absorption is due to several large transactions in newly constructed, and often tax-abated, parks. Whether or not this level of construction and sizable deals is sustainable remains to be determined, but many trends within the economy indicate that this can continue.
Geoffrey Orf, Colliers International
The vacancy rate for the St. Louis industrial market dropped to 6.21 percent in the third quarter of 2018, the lowest rate since 2006. This drop in available space bumped average direct asking rates up to $4.58 per square foot, the highest level since before the recession.
Earth City and North County have the highest vacancy rates in metro St. Louis at 11.05 percent and 11.14 percent respectively. The Earth City vacancy rate has been trending downward since its high of 16.9 percent in 2012. North County’s vacancy rate increased to over 15 percent in 2017 after the completion of NorthPark DC I, a 537,753-square-foot distribution facility that is still vacant, as well as significant new construction in tax-abated parks in the city of Hazelwood.
Under construction
The construction boom in St. Louis started in 2015 with 2.2 million square feet completed and another 3.3 million square feet under construction. The market delivered 6.3 million square feet in 2016 and 4 million square feet in 2017. The highest level of construction completions before this period occurred in 2006 and 2007, which both recorded over 3 million square feet of deliveries. This sustained period of construction growth is very significant for the St. Louis industrial market. Projects in the pipeline indicate that this trend should continue for the next two years with World Wide Technology’s 2 million-square-foot campus in the Gateway Commerce Center in the Metro East topping the list.
World Wide Technology’s new lease for these two buildings will be the largest lease in the history of the St. Louis industrial market. It is the latest of several large deals dominating the industrial landscape. Another significant deal signed in 2018 was the new 855,000-square-foot Amazon fulfillment center under development by Duke Realty in Premier 370 in St. Charles County.
Much attention has been paid to Amazon’s impact on the market. Since it entered St. Louis in 2016, the distribution giant has occupied nearly 2 million square feet. Amazon’s pursuit of same-day delivery is impacting the consumer’s time demands for last-mile delivery. If same-day delivery becomes a reality in major cities, this will influence the size and location of future distribution facilities. As other retailers and e-commerce companies try to compete with Amazon’s services, we expect the demand for industrial distribution spaces to continue to grow.
The labor effect
The need for industrial space is largely driven by consumer demand, but another important factor for facility location planning is the availability of a qualified work force. The U.S. unemployment rate remained at 3.7 percent from September to November 2018. This is down from 4.1 percent in November 2017. The unemployment rate for the St. Louis region dropped to 2.8 percent in October 2018, down only slightly from one year ago (2.9 percent), but significantly lower than the 4.2 percent rate in October 2016.
Recently released county employment and wage data show that total U.S. wages grew by 3.7 percent between the first quarter of 2017 and the first quarter of 2018. St. Charles County experienced the highest regional growth with 5.2 percent, followed by St. Louis County with 4.9 percent and the city of St. Louis with 3.9 percent. Wage growth was smaller on the Illinois side. Madison County experienced only 1.3 percent growth while St. Clair County had only 0.9 percent.
Among other factors, strong employment and wage growth increase consumer purchasing power and consumer goods demand, resulting in a need for more industrial space. However, many employers are worried about the tight labor supply across the country and in our region.
St. Louis has dropped out of the top 20 largest metropolitan areas by population and is currently ranked at No. 21. St. Charles County has the highest population growth rate, with the city of St. Louis at the bottom for the region with significant population loss. There are positive trends in the last national census showing that the city of St. Louis did experience growth in millennial and early retiree populations.
The St. Louis industrial market is poised for substantial growth over the next year with a pipeline of large deals already signed and significant construction deliveries. Barring a slowing of the U.S. economy, we expect this to be a sustainable growth trend for the St. Louis industrial market.
— By Geoffrey Orf, Senior Director, St. Louis, Colliers International. This article originally appeared in the January 2019 issue of Heartland Real Estate Business magazine.